The USDA Rural Development Guaranteed Housing Loan Program is one of the most popular federally backed home loan programs in the United States. USDA home loans are guaranteed by the United States Department of Agriculture, have zero down payment requirement, and almost $0 move in costs capability . The loans are available to those looking for a property in rural areas, or homeowners who already own a house in “rural” U.S.A. For all the wonderful benefits this mortgage program provides, USDA home loans also have their share of disadvantages, which can make them unsuitable in some cases. To help clear up any confusion and assist you in taking informed decisions, here are some eligibility criteria and some pros and cons of USDA loans.

Eligibility Criteria

Property Location

First and foremost, the property of choice must be located in USDA loan-eligible territory. To check whether your property lies in this territory, visit the US Department of Agriculture’s website: https://eligibility.sc.egov.usda.gov/

Property Condition

The USDA will require that your property be in good condition and meets its property eligibility guidelines. To determine the home’s condition, state certified inspectors will visit the property and survey it to ensure:

• There are no signs of termite and pest damage or infestation.
• The property is structurally sound.
• The plumbing, water, sewage disposal units, and electrical systems are functional and calibrated.

Employment Status

Though the USDA does not require borrowers to have a minimum employment history in any one position or company, you do still need to provide proof of steady income over the past 2 years.  The lender’s underwriters will request verification of this through documents such as W2’s and tax returns.  If you are self employed, you would also be asked to submit tax returns. If you have a gap of more than 30 days in your employment history, draft an explanation letter giving reasons for the gap. Even if you do not have steady employment for the past two years, you can be eligible subject to the condition that you have a new job, or are returning to work after a long leave.  Ask your mortgage expert for further details on this one, as there may be some nuisances that an expert could guide you through.

Income Guidelines

USDA home loans are provided to low to moderate income individuals or families. As such, the program places an income limit for eligible borrowers. To qualify, your family income (family size 1-4 members) must not exceed $75,650 (in most counties) and $153,400 (for high cost areas). This limit is $99,850 and $202,500, respectively, (for a family with 5-8 members). The income limits, however, change with time so check with your mortgage expert to help you determine eligibility.  In general, the baseline rule is that it cannot exceed 115 percent of the area’s median income (AMI).

Credit Score

The minimum credit score to get a USDA loan is 640.  That said, borrowers with a lower credit score may still qualify after further review from an underwriter, called a “manual underwrite”. Under no circumstances, however, can the minimum credit score go below 580.

Pros and Cons of USDA Loans

Advantages

• Zero down payment
• Lower interest rates
• 100 percent financing available. You also have the option to finance mortgage insurance.
• Zero pre-payment penalty
• You can use gift funds to cover closing costs

Shortcomings

• Geographical limitations (the property must be located within USDA loan-eligible territory).
• Only single family units can be financed.
• Borrowers need to pay mortgage insurance.
• Income restrictions